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HomeFinance and AccountingBusiness FundingIs a Merchant Cash Advance Right for Your Business?

Is a Merchant Cash Advance Right for Your Business?

Is a Merchant Cash Advance Right for Your Business
Photo by Clay Banks on Unsplash

It’s the norm for small businesses to routinely find themselves struggling to maintain efficient cash flow. SMEs generally operate with razor-thin margins and often encounter the kinds of financial hiccups that can cause outright chaos.

In fact, surveys conducted on SMEs in the UK have found that close to 50% find covering day-to-day costs their single biggest challenge. Irrespective of how prosperous their businesses may be, covering immediate costs in a way that enables the business to perform with total efficiency can be all but impossible.

From equipment purchases to staffing costs to urgent repairs to premises, SMEs often need to come up with significant sums of money at short notice.  Precisely where a merchant cash advance could help, as an alternative to more complex and costly commercial loans.

What is a Merchant Cash Advance (MCA)?

A merchant cash advance effectively blurs the lines between several more ‘conventional’ borrowing products. An MCA combines all the benefits of a business loan, an overdraft and a credit card, though can be more flexible and affordable and all three.

Technically offered in the form of an unsecured loan, a merchant cash advance is issued against future credit card transactions processed by the business. You borrow an agreed sum of money at a fixed cost, after which the balance is gradually repaid over the course of several months.

This makes an MCA a uniquely flexible and affordable funding solution, as the amount you repay is tied to your takings. You pay more when business is good, and less (or even nothing at all) during quieter times. All with the same fixed borrowing costs, irrespective of how quickly or otherwise the facility is repaid.

How Does a Merchant Cash Advance Work?

For the most part, a merchant cash advance works in a similar way to a conventional loan unsecured loan. The main differences are in the way the loan is repaid, and the general flexibility of the facility.

A basic overview of how MCAs work:

  1. The business approaches a merchant cash advanced specialist with a request for funding
  2. The lender takes a look at their average monthly card transactions over a given period
  3. This information is used to calculate an appropriate maximum loan size for the SME
  4. An offer is presented to the SME to take out a loan for this amount
  5. The advance is accepted by the SME, and the funds are made available
  6. The borrowing costs are deducted from the loan at the time it is issued, so the SME knows exactly how much the facility will cost
  7. For example, if a loan of £5,000 is requested, the actual amount received by the business may be £4,500 after borrowing costs are deducted.
  8. The business can then use this money as they like, with no specific restrictions
  9. Each month, the lender collects a fixed percentage payment of all card transactions processed – typically 10% to 25%
  10.  This continues until the money borrowed is repaid, along with the agreed borrowing costs

The immediate benefit of a merchant cash advance is the way in which repayments on the facility are flexible, in accordance with business takings. A fixed percentage is collected on credit card transactions, meaning the amount you pay is tied to the performance of your business at the time.

Plus, irrespective of how long it takes for the balance to be repaid, interest and borrowing costs have already been paid in full at the time the loan was issued,

For more information on any of the above or to discuss the benefits of MCAs in more detail, contact a member of the team at UK Commercial Finance today.

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